Smart and informed approaches to starting a small business, buying a business, selling a business and small business management. Real world examples, tips, successes and dangers.

Sunday, January 6, 2013

Anatomy of a Successful Small Business Purchase

Although
the names, location, types of businesses and other details have been changed
for confidentiality purchases this Hub reflects real transactions in the world
of buying and selling a business.

The Buyer

Susan,
45, had been employed in the corporate world for 15 years and had done well,
worked hard and gotten good performance ratings. She felt like she would be
with her company for a long, long time. She thought that right up until the
moment when, on a Friday afternoon, she opened an email from the company CEO
stating that the company had just agreed to be acquired and more details about
what that means to individual employees would be forthcoming in the next few
weeks and months.

This news
wasn't a total surprise since there had been rumors for months but now it was
real. Susan felt like her group might get consolidated and that, though she
might survive, she was fairly certain that would require a move for her family.
However, within weeks it became apparent that no one in Susan's group was
likely to survive the merger and now they were just waiting on the details of a
severance package, if there was to be one.

Susan
began as many in her situation often begin, she updated her resume, did a quick
analysis of her current financial situation and started thinking about where
she might look for another job. She started going through her contacts and she
quickly found out that another job at her pay grade was likely to be very
difficult to find. In addition, she wondered what would happen if her job
search went on for months or even years, would she need to use up her savings
and 401k money just to live on while she was looking for work?

What
other options did she have? One of her contacts asked her if she ever consider
owning her own business. Susan had only occasionally given it a brief thought
but decided to investigate it more closely since she had no idea what the process of buying a business entailed.

Susan's
financial situation wasn't great but wasn't terrible either. She had some
liquid assets (about $30k cash), not much debt, pretty good credit and her 401k
plan had about $125k in it. She considered her 401k sacred and had no plans to
touch it until retirement. Susan's salary was $90,000 per year with the
occasional bonus....although there hadn't been one for the last two years.

Susan had
no idea how to find a business to buy and didn't know what are the right questions to ask when buying a
business so she did the obvious, she googled buy a business Houston Texas.

Arthur
had owned his small manufacturing business, XYZ, Inc, for 30 years and was
comfortable. It had been a good business for him. Arthur had recently turned 68
years old and, although he had hoped otherwise, his children had their own
careers and weren't returning to run the family business.

Arthur
was talking to his accountant about his taxes and mentioned he had had some
health problems. His accountant asked Arthur if he intended to run the business
until they carried him out on a stretcher or did selling the business make more
sense for him? After talking with his wife Arthur decided selling the business
was the right thing to do. He could get the value of his business to fund his
retirement, relax, travel more and enjoy his family.

Arthur
told his CPA he was ready to sell and his CPA referred Arthur to us.

XYC is a
light manufacturing business that makes a variety of small parts used in the
transportation industry. Arthur hadn't really worked on growing the business
for the last 10 years. He had a variety of regular customers and didn't have
any organized sales effort. At this point in his life he felt like growing the
business would be more work than he wanted to do. He liked his 30-40 hour work
week.

•XYZ did $1,200,000 in annual sales most years and didn't vary much from
year-to-year

•XYZ's
net profit available to Arthur was consistently around $180,000 per year. This
$180,000 is often called Seller's Discretionary Earnings (SDE) because it
includes Arthur's salary and all of Arthur's substantial benefits. Many of
these benefits are in pre-tax dollars so they can't be directly compared to a
salary that might be earned from working as an employee at a big company.

•XYZ
didn't have any debts other than what was normal accounts payable owed to
suppliers.

•XYZ
was located in a leased building and did not own the real estate.

•Asking
Price for the Business $675,000 - FYI- How we determined the asking price is
too long for this post and I'll create another Hub to describe the business
valuation logic and methodology.

The
Transaction

Susan
came to us looking for a business to buy and based on her experience, skills,
lifestyle and financial capability we decided to present XYZ company to her.
(Here is a post about Confidentiality when buying a
business).
Susan liked the industry and the business location. We provided her with some
high level financial reports for her review and Susan decided she wanted to
look more closely at this opportunity.

We
arranged for Susan and Arthur to meet to tour the business and for Susan to ask
Arthur all the questions she felt were important. After due diligence, research
and negotiations here is the final transaction that was completed and Susan
purchased the business which she still runs today.

Selling
price $655,000

Susan's
down payment was $110,000 which she obtained, tax & penalty free, from her
401k plan.

•The
business is paying the debt. On a straight line basis Susan is building $60,500
per year in equity ($605,000 divided by 10 years). That's a 55% investment
return per year on Mary's equity of $110,000, I doubt you can get that kind of
return over 10 years in any other investment.

Summary:

•Susan
was able to immediately replace her $90,000 per year, fully taxable salary with
$100,000 per year of income that had significant tax advantages.

•Susan
had no worries about being laid-off ever again. She did have a business to run
that comes with it's on worries but at least Susan feels like she is in
complete control and can manage any problems successfully.

•When
the day comes for Susan to sell the business she expects the value of the
business to have far outgrown the value of her $110,000 had she left it in her
401k plan and relied on the luck of the stock market. Susan, like Arthur before
her, is now in total control of her retirement investment.

If you have the
skills to operate a successful small business the financial rewards can be
tremendous.

If you want a good book on Buying a Business here is our recommendation:

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